11 Oct, 2016

Understanding the Importance of Due Diligence and Title Search Reporting

When purchasing or selling a piece of real estate, it is always important to have a title search done on the property, especially when it involves commercial real estate for development.

Whether this is your first project or you tackle multiple projects at a time, the thorough examination of the title should be a part of your due diligence for each and every deal. Title searches provide a history of the ownership of the property and alerts the buyer of any potential defects in the chain which would affect clear title.

Depending on what part of the country you’re buying in, a title report or title commitment is usually provided showing the current owner of record, a legal description of the property, any easements, restrictions or covenants which would apply to the property and exceptions to the title policy. The search would also inform the buyer of liens, open mortgages, back taxes or current taxes owed which would prohibit the buyer from obtaining clear title to the property. In other words, the title search gives you a better understanding of the history of the property, the chain of title, and what issues could impact the transaction.

In many commercial cases, developers and attorneys wait to order the title search after the due diligence period has already expired. This is usually done to avoid a large title search bill if the deal falls through. However, if something unexpected shows up on the search, such as certain restrictions or complicated liens, this can cause issues with closing and wasted time and money.

The attorney and developer can review title searches ahead of time so you know exactly what you’re getting into, and if you have the means and the time to fix any problems.  Larger title issues can impact the timeline of the project, the value of the property and the viability of the transaction. They can also affect whether a commercial title insurance policy can be issued. Certain issues may require additional cost endorsements to the policy or special approval from the underwriter.

When you’re putting in large sums of money into a commercial real estate transaction, it is wise to order the title search on the front end, even if it means paying the title search cost if it doesn’t close. This is a small price to pay when you think of the alternatives such as future title clean up fees, or even costs to fight for your title if someone claims to have rights.  It is important to make sure you purchase an owner’s title insurance policy to protect your interests.

If you’re thinking of purchasing commercial real estate property, consider getting the title search early to give you and your attorney ample time to review it for any potential problems. If a situation arises during your due diligence period, you may be able to terminate the contract without penalty and have your earnest money returned.

For more information on title searches, commercial transactions or title insurance, contact our team at U.S. Title Solutions today!

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